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Portugal faces two years of recession due to bailout deal

Unemployment predicted to rise to 13 percent as public deficit is slashed under terms of IMF/EU loan program

Portugal's Socialist caretaker government on Thursday sealed up to 78 billion euros in emergency funds from the International Monetary Fund and the European Union, but the conditions attached to the bailout loan will drive the country's economy into a deep recession over the next two years.

Portuguese Finance Minister Fernando Teixeira dos Santos told a news conference that the economy is likely to shrink by two percent this year and the next as a result of the austerity measures that accompany the agreement.

Unemployment is also expected to increase, hitting 13 percent in 2013, compared with 11.1 percent at the end of 2010. Public debt as a percentage of GDP will also continue to rise through to 2013, the minister said.

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The program aims to reduce the country's budget deficit from 9.1 percent last year to 5.9 percent this year, 4.5 percent in 2012, and three percent in 2013. Of the 78 billion euros, 12 billion will go to shore up Portuguese banks. A general election is scheduled for June 5.

Teixeira dos Santos was speaking after the Portuguese Cabinet had given its approval to the program, which also received the backing of the main opposition Social Democrat Party (PSD) and the People's Party (CDS-PP). PSD leader Pedro Passos Coelho late Wednesday described the measures as "tough" but "necessary."

"The program's success will require a truly national effort," the European Commission and the IMF said in a joint statement. "We recognize that this program will require major efforts from the Portuguese people."

The conditions include draconian spending cuts, a hike in excise duty on items such as carts and cigarettes, a public sector wage and pension freeze, cuts in unemployment benefits as well as a privatization drive to bring in 5.5 billion euros.

"This is a program aimed at returning to growth and employment Teixeira dos Santos told reporters.

The minister said 78 billion euros was sufficient to meet Portugal's funding needs, adding that the country would start receiving part of the loan in sufficient time to meet large bond redemptions commitments due on June 15.

Speaking at a news conference in Lisbon, IMF mission head Poul Thomsen predicted the economy would face "strong headwinds in the next three years" with a recovery only expected to emerge in the first half of 2013.

The IMF's contribution to the loan is 26 billion euros, with the rest coming from the European Union. Thomsen said Portugal will pay 3.25-percent interest on the loan in the first three years and 4.25 percent from the fourth. The rate on the EU contribution to the loan is expected to be set at the euro-zone finance ministers' meeting on May 16-17.

Greece is paying an average 3.5 percent over the first three years of its bailout program, while Ireland, which is seeking more favorable terms, is paying 5.8 percent over a longer period.

"This program shows a strong commitment to Portugal and to safeguard financial stability in the euro area," European Commission official Jürgen Kröger told the same news conference. "This is not easy. It's tough, but we also consider it to be fair."

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